By Tiernan Ray

Piper Jaffray’s Gus Richard today reiterates an Underperform rating on shares of Intel (INTC), and a $20 price target, writing that the company “keeps investing in fabs and process technology that is likely to result in diminishing returns, in our view.”

Richard’s first point of concern is the article this morning by Jessica Lessin, Lorraine Luk, and Juro Osawa stating that Apple (AAPL) has signed a long-rumored chip deal with Taiwan Semiconductor Manufacturing (TSM) to move some production away from Apple’s chip supplier and arch-rival, Samsung Electronics (005930KS):

Taiwan Semiconductor and Apple have reportedly signed a three year foundry agreement for 20nm, 16nm and 10nm. We believe it is now unlikely for INTC to get any of Apple’s business in CY14 or CY15 and in a best case scenario only some of the business in CY16. We estimate Apple’s mobile processor business is a $5-6B/year. We also think it is highly unlikely for Samsung to broadly adopt Intel’s CPUs in its smartphones or tablets. We think this shuts the door on the high-end mobile market for Intel for the foreseeable future. We believe this also limits Intel’s ability to drive mobile and foundry revenue over the next two years.

Interestingly, Richard actually notes Taiwan Semi has stumbled in some of its production efforts:

Even though TSMC has signed Apple, it continues to fail to execute. It has been reported in the press that the Apple/TSMC deal was delayed due to power issues. Our contacts have confirmed the power consumption issues at TSMC at 20nm. This is on the heels of missteps at 40nm, 32nm and failure to meet customer demand at 28nm last year. We believe 16nm is unlikely to be in production at TSMC next year. While TSMC is not catching up with Intel, we do not think they are losing ground. TSMC remains a fast follower.

Despite Intel’s lead in chip technology, Richard actually thinks TSM, IBM and others pose a credible threat, in part because Intel doesn’t have the right intellectual property to fill the fabs:

We expect Intel to ship 14nm product at the end of this year. Right behind Intel is Samsung who is working on its first FinFET process and we expect Samsung to start shipping 14nm in CY14. Behind Samsung and Intel are TSMC, STMicroelectronics and IBM. Surprisingly, IBM and STM look to have surprisingly strong process technology at 14nm. IBM has a FinFET transistor built on Fully-Depleted Silicon on Insulator (FD-SOI) and STM continues to work on FD-SOI. We believe the IBM and STM processes provide low power and very good analog performance. While Intel remains in the lead in process geometry, we do not believe they have a lead in the SoC designs needed for the mobile era. Intel needs to drive either foundry or mobile revenue to fill its fabs in a stagnant PC environment […] We are seeing a resurgence in IBM’s foundry activity. We believe the company recently signed a licensing deal with ARMH for its 32-bit processor line for ASIC customers. Moreover, our contacts are telling us that they are making customer visits promoting their 14nm process.

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There are 14 comments

JULY 1, 2013 3:28 P.M.

theseguysareidiots wrote:

" We believe 16nm is unlikely to be in production at TSMC next year. While TSMC is not catching up with Intel, we do not think they are losing ground. TSMC remains a fast follower."

At this time next year, Intel will be ramping up 14nm finfet, TSMC will not have its HALF finfet till 2015 or latter.

Intel will have 10nm in 2015, Apple is in serious trouble

JULY 1, 2013 3:52 P.M.

Joe wrote:

@theseguysareidiots

Why is Apple in serious trouble?

Even if they have a deal with TSMC, that does not mean it is exclusive. In fact, there is no way that any agreement says that Apple must buy all of its chips from TSMC especially if TSMC can't meet the requirements of the contract.

Any deal with TSMC is about moving production from Samsung, but Apple has always used multiple sources for its components and that can include Intel.

Additionally, it is likely that Apple will adopt Intel's x86 processors at 14nm for the iPad in 2014, but that they will keep the smaller devices (iPhone, iPod Touch, and perhaps iPad Mini) using the Apple-designed ARM-based processors.

JULY 1, 2013 4:29 P.M.

Bill wrote:

Joe> Apple has always used multiple sources for its components
Not so. They sole sourced A series processors with Samsung. TSMC is at least 18 months behind Intel and they have a mediocre track record of ramping volume at leading edge processes. I doubt Apple has the resources or volume to justify multiple A series processor vendors. Apple is missing a golden market window to migrate from Samsung to Intel. Why would Apple adopt x86 for iPad when the A series processor gives then better power/performance and allows then to differentiate from the competition?

JULY 1, 2013 4:44 P.M.

Cured_Trader wrote:

Piper Jaffey has been beaish on Intel for a while. They obviously have a bunch of clients that are short Intel. It would not make sense at this time with the market subject to a farily signficant pull back in the short and intermediate term for Piper to turn neutral, musch less buliish on Intel.

Short term I agree Intel is a risk and the odds are probably greater that it will lower come December 31, 2013 than it is now. However intel has some dynamite chips in the works like Broadwell and Skylake scheduled for reased in 2015. I would wait for a board market pull back before buying Intel. Not only will you get it cheaper but with a higher dividend yield. My 2016 price target for Intel is between $40 and $50.

JULY 1, 2013 4:46 P.M.

Cube Monkey wrote:

Piper Jaffrey reiterates underperform on INTC. Whew. Ok, the world is right. I would expect the sky to remain blue and water to remain wet. If Piper Jaffrey ever says INTC is a buy, then I'm worried that the world is going to end.

APPL signs deal with TSMC - good for them - a three year deal for 20/16/10nm - does anyone think that TSMC will be shipping 16nm in HVM in 3 years? Maybe at the end of the 3 years. 10nm? I can envision Jobs rolling over in his grave.

Unsure why this bodes so poorly for INTC. Since when does INTC "need" APPL for growth? Who knows? In 3 years, APPL may jettison their PA-Semi design team and swtich to X86 for its tablets.

JULY 1, 2013 8:26 P.M.

Unbelievable! wrote:

It's unbelievable how these sell side analyst get away with so much bull.
"We Believe this we believe that".
Believe whatever you want, Intel is the only source I believe since
Intel has proved these crooked analysts wrong countless times.
"our contacts"
Give me a break!
Barrons needs to ignore this type of stuff as relevant news without getting something from the actuall manufacturers or Intel themselves.

JULY 1, 2013 10:10 P.M.

check their record wrote:

Read his pump on QCOM and rant on INTC from a few months back and compare the charts. Good call Gus. I guess he has decided to take matters into his own hands (mouth) to try an get the stock to move on conjecture as opposed to fundamentals.Typical.

Spend some time listening to what Paul Otellini has been saying and now what Brian Krzanich has to say. Then ask yourself the question, who do you trust? Auguste Richard? Please.

JULY 2, 2013 12:54 A.M.

Anonymous wrote:

Great! Taiwan will be richer after Samsung. And the USA is graving and ask for more unemployment benefits.

JULY 2, 2013 1:10 A.M.

Anonymous wrote:

This means more unemployment in the US. How much Apple has been helping the country with education, charity, innovation, and volunteerism? How many people Apple employs in the US? Do you see that phrase? Design in the US, made in China, this time it will say: made in Taiwan. For those you have been able to afford Apple productions, your good days are in number, and so are mine.

JULY 2, 2013 1:33 A.M.

James wrote:

So basically the WINTEL empire is dead in the world of mobile (smartphones and tablets).

Both Microsoft and Intel have missed the bus as the PC desktop market continues to contract.

JULY 2, 2013 12:00 P.M.

AreTheseAnalystsSerious? wrote:

This is such a load of bull. Not getting the A-chip business is not surprising as intel would never want it. Why would Intel want to build some other companies inferior chips at lower margins when they can use their capacity to build their superior chips at higher margins. Anyone who thinks Intel would do such a thing really doesn't understand Intel. Intel's leadership has repeatedly stated that they would not enter fabrication deals that would give direct competitors access to their bleeding-edge fabs. Intel will own the tablet space in a year and Apple will switch to Intel chips or be at a huge competitive disadvantage.

JULY 3, 2013 4:26 P.M.

wegap wrote:

We estimate Apple’s mobile processor business is a $5-6B/year. --- How ??

JULY 4, 2013 1:26 P.M.

SYSTEMS ANALYST wrote:

"If there was a great customer that we had a great relationship with laptops and other mobile devices, and they said look, we'd really love you to build our ARM-based product, we'd consider it. It depends on how strategic they are," Krzanich said.

Apple or Samsung?

JULY 26, 2013 5:44 P.M.

Sean wrote:

People seem to forget that the IProducts of Apple almost never have the latest generation chip technology inside. Apple has never needed to have the newest/smallest/fastest processor to be successful with their iPhone and iPad as they focus on the user experience more than the spec sheet.

That philosophy is in direct contrast to Intel's historical approach of selling another .1% performance on the spec sheet as a marketable upgrade. There are a lot of phones on the market with better processors than an iPhone, there aren't a lot of phones on the market better than an iPhone. And in the cases where they are, it has nothing to do with the chip inside.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.